DEAR BARRY: As a mortgage broker, it bothers me that home inspection reports are never included with a loan application. This is a risky omission that became clear last week when I hired a home inspector for a house I’m buying. My inspector found major defects in a home that is only 3 years old.
When I consider that my company and other lenders routinely approve purchase loans without any disclosure of property defects, I realize that the mortgage profession is essentially "driving blind," handing out six-figure loans on properties we know very little about. What can be done to close this major liability gap? –Cory
DEAR CORY: Lack of concern for property defects is a chronic blind spot in the mortgage loan business. And your industry is not alone in this careless practice. Companies that write homeowners insurance policies are equally unconcerned about property defect issues. In nearly every case, mortgage loans and homeowners insurance policies are written without any knowledge of conditions affecting foundations, site drainage, roofing, plumbing, heating, electrical violations, fire safety violations, and so on.
Lenders routinely write purchase loans without knowing the condition of the collateral that secures their money. Loans are often based exclusively on market appraisals, without adjusting those valuations for the costs of needed repairs. Likewise, insurance companies often underwrite the fire safety of properties without disclosures of building violations that could increase the likelihood of a fire or other costly mishap.
Some insurance companies are beginning to show an interest in defect disclosure, but they provide abbreviated report forms for home inspectors to fill out, rather than requesting copies of actual home inspection reports.
Changes are needed to close these liability gaps, but change cannot take place until mortgage lenders and insurance underwriters recognize the benefits of accurate defect disclosure and its effects on their profitability. In the meantime, you as an individual broker can request copies of inspection reports that are generated during real estate purchase transactions.
That will improve the valuation of home purchase loans. With refinance loans, however, home inspections rarely take place.
DEAR BARRY: We just bought a 1942 home, and we hired a home inspector, as you always recommend. Our inspector did a very thorough job, but after moving in we found peeling paint where the walls had been hidden by furniture. We need to scrape it off before repainting, but we’re worried about lead. What is your advice? –Leonard
DEAR LEONARD: Lead paint is commonly found in homes built prior to 1978. If left alone, lead paint does not pose a significant health hazard. However, small children have been known to incur health problems by ingesting loose chips of lead paint or by teething on painted woodwork, such as window sills. Adults have been affected by lead paint when they sand painted surfaces and then breathe the dust.
The first step is to determine if the peeling paint does contain lead. This can be done by a certified environmental assessor. Check the Yellow Pages under "Lead Testing and Consulting." If the paint is found to contain lead, have it removed by a licensed painting contractor who is qualified to do lead abatement.
To write to Barry Stone, please visit him on the Web at www.housedetective.com.
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